The fact that foreign exchange trading has been such a global operation means that macroeconomic activities all over the world play a larger role in forex than ever before. Forex is a real global marketplace, with buyers and sellers from all parts of the globe engaging in trillions of dollars of trade every day.
Traders no longer need to adhere to popular currencies, but they’re a good place to start. Below, certain global developments and activities will be addressed that will assist those new to the sector to become active forex traders.
Macroeconomics’ Position in Forex
The forex market is driven mainly by underlying macroeconomic variables. Such variables impact the actions of an investor and eventually decide the worth of a currency at any given point in time. The economic stability of the economy of a country is a key influence in its currency’s exchange rate. Based on current events and new knowledge, overall economic health will swiftly shift. Most of the better forex traders, though, are extremely disciplined and adhere to a set of rules for trading. Let’s take a closer look at some of the factors that affect the status of an economy and cause shifts in its currency’s value.
Forex and Financial Markets
Probably the most obvious markers of the wellbeing of an economy are the financial stock markets. The release of public information in the financial markets is easy to observe. Media analysis and up-to-the-second knowledge on the dealings of companies, institutions, and government agencies are continually streaming. A rally or sell-off of shares originated in one or another country should be a strong indication that there has been a shift in the potential outlook for that economy.
Similarly, many markets, such as the commodity-based economy of Canada, are sector-driven. The Canadian dollar, including crude oil and metals, is closely associated with commodities.2 A spike in oil prices will undoubtedly lead to an increase in the Canadian dollar compared to other currencies.
Commodity traders rely heavily on economic data for their trades, like forex traders. The same data would have a strong effect on both markets in many situations. An interesting issue is the trading of currencies and product correlations.
As both fixed-income instruments and currencies depend heavily on interest rates, bond markets are equally important to what’s happening in the forex market. Treasury market changes are a factor in exchange rate changes, which suggests that currency prices would be directly influenced by a change in yields. Therefore, to succeed as a forex trader, it is important to understand bonds, and especially government bonds.
Forex Regulations Continue to Alter How Markets Functions
Regulations can affect the forex markets as businesses that are impacted might need to change their procedures and practices. MiFID, EMIR, the Tobin Tax and Dodd-Frank FX are all rules that need to be followed in the forex trading world. These rules continue to alter the way market participants trade and the way firms handle forex traders. There are several steps that a forex broker or dealer would need to undertake to make sure they followed forex regulations.
Monitoring Position Size
Under the MiFID program, government authorities that regulate the forex markets can terminate unusually large trades. Most of these new rules will impact those who are regulated by the European Securities and Market Authority. The reason behind this regulation is to help authorities monitor positions that could generate unwanted volatility in the forex markets that could potentially threaten the entire securities market. The rule has had an impact on the market as forex trading firms have become their-own watchdogs, keeping a close eye on traders who are taking large positions especially ones that could threaten the ability for the market to function properly. Another situation that could arise is that forex firms that are regulated by ESMA might consider restricting the number of transactions a trader takes withing one day to avoid the interference from authorities.
Managing Third-Party Relationships
Regulations now strictly forbid accepting gifts or payments from third parties. Before these regulations from MiFID, an investment advisor or trader was able to accept payments from third parties as part of their normal business practice. These payments or gifts would incent an investment advisor to use a third party, even if the business was unwanted or needed. The regulations have put Forex forms on notice that the relationships that they have with third parties needed to be at arms-length. The goal of this regulation is to make sure that forex firms that are transacting with third parties do not have a conflict of interest when conducting online trading.
Assessing derivatives and putting forth an estimate of market structure is forbidden under the Dodd-Frank legislation. Unfortunately, complex structures that use forex markets are important to traders that depend on estimates to conduct transactions. Trade entities now need to be careful in their estimated assessment especially if they are going to be published in any form of written product or given to a media outlet. The reporting requires under the Dodd-Frank regulations in forex swap dealers (mainly banks and investment banks) need to be registered. Their forex records need to be maintained by the company and each transaction needs to have a clear value along with pricing.
The Tobin Tax and the EMIR
This regulation requires that a forex firm taxes every transaction that is entered by a forex trading firm. This has helped to limit the number of transactions and in cases has caused traders to seek other firms in countries that are not regulated by the Tobin Tax. The EMIR regulations require that OTC derivate contracts that must be traded on an electron platform.
Forex and World Markets
The balance of trade between nations is another important factor. The trade balance acts as a metric for a country’s relative demand for commodities. A country with goods or services that are globally in high demand would usually see an appreciation of its currency. For starters, if they wish to purchase merchandise from Australia, buyers must turn their money into Australian dollars. The increased demand for the Australian dollar would put its value under upward pressure.
Countries with major trade deficits, on the other hand, are net sellers of international commodities. To buy the currencies of other nations to pay for imported goods, more of their currencies is exchanged. This sort of scenario is expected to have an adverse effect on the value of the currency of the importing nation.
Markets for global reporting and Forex
In the overall outlook for a nation and, ultimately, the relative value of its currency, the political landscape plays a critical role. In order to predict changes in the economic policies of national governments, forex traders actively track political news and events. This can entail increases in government spending and revisions to legislation levied on individual businesses or sectors. Changes in the margin or leverage laws that are open to traders often have a drastic effect on markets.
For the currency markets, elections with unpredictable returns are often relevant events. Exchange rates also react favourably to wins by groups that are pro-growth or fiscally responsible. A referendum could have a major effect on exchange rates as well. The Brexit referendum, which had a dramatic influence on the British pound as the UK voted, is a prime example. Voted to exit the EU.
The most important considerations in its economic decision-making are the fiscal and monetary policies of every country. Central bank decisions concerning interest rates are closely watched by the forex market for any shifts in main rates or policymakers’ future outlook.
Forex and Economic Statistics
The backbone of a forex trader’s playbook is economic reports. In this fast-paced marketplace, keeping an economic report schedule is key to remaining current. The most visible economic metric may be the gross domestic product ( GDP) since it is the basis of the economic success and power of a government. The cumulative production of goods and services provided within an economy is calculated by GDP. It is important to note, however, that GDP is a lagging predictor. That means that it focuses on incidents that have already happened and developments.
As it sends a warning of rising price levels and falling buying power, inflation is also an important predictor. Inflation is a double-edged sword, though. Because of retreating buying power, many see it as putting downward pressure on a currency. Inflation may also contribute to currency appreciation, as central bankers can be pressured to raise rates to curb increasing levels of inflation. Among economists, inflation is a fiercely debated problem, and its currency consequences are seldom straightforward.
Jobs rate, retail prices, industrial indices, and capability usage also offer valuable statistics on an economy and its currency’s actual and expected power. For the key variables we have described above, they will provide evidence.
The Bottom Line
The upshot is that its important to understand new regulations that will impact your costs, as they might spillover from your forex broker to you. Your broker could be required to participate in many of the new forex regulations to maintain its status under its regulator. Forex regulations that become too large are subject to regulatory scrutiny and could unset the apple-cart.
A Trade in Forex Standard
It’s helpful to understand how a traditional forex exchange performs before you decide whether to trade forex with bitcoin.
At the present rate, a forex swap is essentially an exchange of a currency with another. Forex merchants try to make money off the continuous swings in the actual value of one currency against another, unlike visitors who swap their home currency for local spending money.
The Decentralization Effect
The main difference is that, while forex markets can be decentralised, in the countries that issue them, the currencies themselves are backed by central banks. These banks have the task of stabilising the value of their currencies and keeping them steady. That support is not sufficient for Bitcoin and most other cryptocurrencies.
Forex Trading Benefits Of Bitcoin
- Decentralized Valuations: A big benefit of bitcoin forex trade is that bitcoin is not connected to a central bank. Digital currencies, including country-specific inflation or interest rates, are free from central geopolitical control and from macroeconomic concerns.
- High Leverage: Bitcoin trades provide leverage for many forex brokers. This can be used by seasoned traders to their advantage. Such high margins can, however, still be viewed with considerable care as they magnify the loss potential.
- Low Deposit Amount: With some Bitcoin forex trading agencies, a trader may begin with as little as $25. A few forex trading agencies have also offered incentives such as a matching sum of a deposit. Traders should verify that the broker is genuine and regulated accordingly.
- Low Trading Cost: In order to draw new buyers, most forex brokers who accept cryptocurrencies hold brokerage costs quite low.
- Security: To make a Bitcoin purchase, you don’t need to show your bank account or credit card information. In terms of expense and financial stability, this is a major plus.
- No Global Borders: There are no global limits for bitcoin transactions. A South Africa-based trader will exchange forex via a United Kingdom-based broker. Regulatory issues may remain a problem, but there are no territorial limitations if both traders and brokers are prepared to make transactions.
Risks of Forex trade for Bitcoin
- Different Exchange Rates: Bitcoin transfers and exchange rates differ on various exchanges. Traders need to make sure they know which bitcoin exchange rates can be used by the forex broker.
- U.S. Dollar Rate Risk: Nearly all brokers automatically sell the bitcoins and keep the balance of U.S. dollars when collecting bitcoin deposits from customers. And if an investor directly after the deposit does not take a forex trading position, he or she is already vulnerable to the bitcoin-to-U.S. From deposit to withdrawal, dollar rate risk.
- Risk of Uncertainty: Bitcoin values have traditionally shown strong uncertainty. In the absence of regulations, unregulated brokers can use volatility to their advantage and to the disadvantage of a trader.
- Bitcoin-inherent security risks: Stored bitcoins are vulnerable to stealing through hacking, including from the digital wallet of a broker. Look for a broker that has insurance cover against fraud to reduce this risk.
- The benefit of Leverage: For inexperienced traders who do not appreciate the exposure, using leverage is dangerous. This risk is not exclusive to the forex trade in cryptocurrencies and even comes into play in conventional forex transactions.
- Asset Class Mixing: Bitcoin is a totally new asset class that has its own system of valuation. In essence, exchanging forex for bitcoins adds a new intermediate currency that can have an unpredictable effect on profit and loss. Any money which is not locked down in the base currency of a trader is a possibility.
There are also many related threats, although cryptocurrencies such as bitcoin are gaining prominence. Dealing in a decentralised currency that offers global transactions with no fees is an advantage in forex trading. Yet in effect, the tradeoff applies a third currency to what was a trading pair.
Traders who want to take on the risk can only use a forex brokerage that is locally controlled.
Understanding the interbank demand for forex
The price or rate of a foreign exchange rate indicates how much it costs to obtain one currency in exchange for another currency. In the expectation that the exchange rate will move in their favour, forex traders buy and sell currencies.
The forex market (or FX) is not a consolidated market, unlike most other markets, such as the New York Stock Exchange ( NYSE) or the Chicago Board of Trade (CBOT). Any transaction is reported by price and volume in a centralised market. Usually, there is one common location back to which all transactions can be traced, and a centralised network of market makers also exists.
A decentralised economy, though, is the forex or money economy. There is not one “exchange” where it tracks any transaction. Without the single characterization of an exchange listing, trade takes place around the world on several markets. For FX trades, there is also no clearinghouse. Each market manufacturer or financial institution, instead, tracks and retains its own trades.
It can be hard to control because of the multinational existence of the interbank market. However, self-regulation is often much more successful than government controls, with such significant actors in the market. For individual forex investments, a forex broker must be licenced as a futures commission merchant with the Commodity Futures Trading Commission ( CFTC) and be a member of the National Futures Association (NFA). To ensure that they follow stringent financial requirements, the CFTC controls brokers.
Individual Investors in Forex
Since their trading size is not big enough to be traded by the interbank participants, most people can’t enter the pricing available on the interbank forex market. In other words, a volume-discounted firm is the forex market, meaning the bigger the exchange, the closer the rate would be to the interbank or market rate.
However, as the more players involved, the more liquidity there is in the market, and the greater the probability of price volatility that can contribute to trading opportunities, interbank members are important to retail investors. The added liquidity also makes it easier for institutional investors to get in and out of their transactions when so much value is exchanged.
The Players of Interbank
The bulk of the overall amount of forex is exchanged by around 10 banks. These banks, including Deutsche Bank (NYSE: DB), UBS (NYSE: UBS), Citigroup (NYSE: C), and HSBC (NYSE: HSBC), are brand names that we all recognise well.
The government and central banks have some of their own centralised forex trading networks, but they still use the biggest institutional banks in the world. The elite group of institutional investment banks is mainly responsible for pricing the interbank and institutional customers of the bank and for offsetting the risk on the other side of the exchange for other customers.
Deal Channels and risk of credit
There are two main channels that interbank traders use, close to the way we see rates on the website of an automated forex broker: one is provided by Reuters Trading, and the other is provided by the Automated Brokerage Service (EBS).
The interbank forex market is a mechanism approved for credit in which banks transact solely on the basis of the credit relationships they have formed. The highest retail prices actually available can all be used by the banks. However, at the prices being offered, each bank must have an approved agreement to exchange. The larger the banks, the more credit connexions they can create, and the more they can access rates. For consumers, such as retail forex brokers, the same is true. In terms of resources available, the bigger the retail forex trader, the more attractive prices it will receive from the forex industry.
Trading in the main currency pairs is provided by both the EBS and Reuters Dealing networks, but some currency pairs are more liquid and graded more regularly. These two firms are actively seeking to win the market share of each other, but still, have some currency pairs that they rely on.
In general, cross-currency pairs are not quoted on either platform, but are measured on the basis of the main currency pairs’ values and then offset across the legs. For eg, if an interbank trader had a buyer who wanted to go long EUR / CAD, the trader would most likely buy EUR / USD over the EBS system and buy USD / CAD over the network of Reuters. Then, the trader will multiply these rates and give the respective EUR / CAD rate to the buyer. The two-currency pair transaction is the reason why the spread for currency crosses, such as the EUR / CAD, appears to be larger and sometimes less widely exchanged than the spread for the EUR / USD.
The interbank forex market is a subset of the overall forex market which, in turn, comprises the world’s largest trading market. Due largely to its volume and systemic experience, the forex interbank market is a catalyst for both pricing and operation in the entire currency market.
Trading desks are well-capitalized for this market and have sophisticated experience in forex currency fluctuations and pricing. Because of the huge notional sums being traded, customers who deal in the forex interbank market have settlement fee advantages.